By Jason Breslow
March 5, 2009
March 5 (Bloomberg) — When Amy Davis stepped into an H&R Block
office in Greenwood, Mississippi, for an advance on her tax refund, it
had been three weeks since her last paycheck.

Davis, 48, said she didn’t want to pay more than $300 in fees for a
so-called refund anticipation loan worth $5,380, but she had little
choice. Her bills were mounting and the mother of two didn’t want to
risk losing her utilities.

More Americans applied for tax refund loans in 2007, reversing two
years of declines, according to a joint study released last week by the
Washington-based Consumer Federation of America and the Boston-based
National Consumer Law Center.

With the U.S. unemployment rate at 7.6 percent, the highest since
1992, consumer advocate groups say more jobless Americans may turn to
high-interest, short-term loans to pay bills.

“You probably have increased demand because more people are
struggling with debt,” said Ira Rheingold, executive director of the
National Association of Consumer Advocates in Washington. “When people
are desperate for cash, they’re desperate for cash.”

Loans secured by a borrower’s expected tax refund often leave
borrowers with effective interest rates of as much as 500 percent for a
$300 loan over a 10-day repayment period, according to the study from
the Consumer Federation of America and the National Consumer Law
Center. Lenders also use a pay stub or car title as collateral for
similar short-term loans.

Deeper in Debt

“People who get these loans are probably people who need money
pretty badly,” said Jim Campen, executive director of the Boston-based
watchdog group Americans for Fairness in Lending. “In fact, they just
got another short-term problem, which puts them deeper in debt.”

Refund loans that Davis used are issued by tax preparers such as
Kansas City, Missouri-based H&R Block Inc. and Parsippany, New
Jersey-based Jackson Hewitt Tax Service Inc. The loans can carry
effective interest rates of 77 percent to 140 percent for the average
refund loan of $3,000, according to consumer rights groups including
the Consumer Federation of America and National Consumer Law Center.

Almost 9 million Americans, or 1 in every 15 taxpayers, paid about
$901 million in fees during the 2007 tax filing year for refund loans,
according to the joint study by the Consumer Federation and the Law

The loans are expensive and unnecessary, said Chi Chi Wu, a staff
attorney at the National Consumer Law Center. They promise taxpayers an
advance on their refund in one to two days, while taxpayers can receive
a refund at no cost within 15 days if they prepare their own returns
and file electronically, Wu said.

Electronic Filing

H&R Block clients are encouraged to e-file, and 80 percent
don’t take refund loans, said Nancy Mays, a spokeswoman for H&R
Block, the nation’s largest tax preparer. Customers pay $58 in fees for
a typical H&R refund loan of $2,700, the Consumer Federation and
the Law Center found. H&R Block’s refund loan revenue was $190
million in 2008, according to a regulatory filing.

“The best way to get your refund is to e-file it and have the IRS
make a direct deposit to a bank account,” said Mays. The company agreed
in January to pay $4.85 million to settle California claims it engaged
in deceptive marketing of the refund loans. H&R Block denied any

One of Jackson Hewitt’s banking partners for its refund loan
program is Santa Barbara Bank & Trust, whose parent, Pacific
Capital Bancorp, was cited by consumer groups in January for allegedly
using money from the Troubled Asset Relief Program to finance the

TARP Funds

None of the $180 million Pacific Capital received from the TARP
“was used to fund refund anticipation loans,” said Toni Rossi, a
spokesman for the Santa Barbara, California-based company. Pricing
refund loans in terms of their effective interest is misleading because
doing so falsely assumes that the loan is outstanding for an entire
year and that the consumer continues to accrue and pay interest, Rossi
said. A Jackson Hewitt spokesman wasn’t available for comment.

In payday lending, a borrower gives a lender a personal check for
the amount of the loan, typically about $300, plus interest in exchange
for cash, said Jean Ann Fox, director of financial services at the
Consumer Federation.

Interest can range from 400 percent to 800 percent, according to
the Federation. The lender holds the check until the borrower’s next
payday, when the loan can be repaid, or the borrower can pay the
finance charges to roll it over to another pay period.

Overdraft More Likely

Those who take payday loans are at least 14 percent more likely to
enter bankruptcy, according to a study published in October by
researchers at the University of Pennsylvania and Vanderbilt
University. Researchers at Harvard University found that consumers who
use these loans are 11 percent to 16 percent more likely to overdraft
and have their checking account closed.

With car-title loans, a borrower offers the title of the automobile
in exchange for a median loan amount of $1,500, according to a study by
the Woodstock Institute, a Chicago-based nonprofit that concentrates on
economic development in low- income communities. Borrowers typically
have a month to repay the loan. If they miss the payment, the lender
can repossess the vehicle. Almost one in five car-title loans end in
repossession, Woodstock Institute reported.

“These quickie credit products leave you worse off if you use them,” Fox said.

Davis, who is a student accounts coordinator at Mississippi Valley
State University in Itta Bena, said she was lucky as she has friends
who were available to help her in the end. She said she’ll “never,
ever” take another refund loan.

“It was a fiasco,” she said.

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